Duty to Ensure Product Suitability and Duty to Disclose Risks www.fsco.gov.on.ca 1

Duty to Ensure Product Suitability
and Duty to Disclose Risks
www.fsco.gov.on.ca
1
A Few Notes Before We
Get Started
•
•
Minimum Screen Resolution - 1024 x 768
How to Ask Questions
–
–
•
•
Type in your question in the “Question” field
Send an email to [email protected]
When and How Questions Will be Answered
Webinar Recording
www.fsco.gov.on.ca
2
Webinar Overview
• Desired Outcomes
• Mortgage Brokerages, Lenders and
Administrators Act, 2006 (MBLA Act) and
regulations covered in this webinar:
–
–
–
Duties regarding suitability of a mortgage or mortgage
investment for a borrower, lender or investor.
Duties to disclose material risks of a mortgage or
mortgage investment to a borrower, lender or investor.
Other duties to the borrower, lender or investor.
• Conclusion
www.fsco.gov.on.ca
3
Desired Outcomes
Borrowers, lenders and investors making
informed decisions
• A mortgage brokerage must:
• Take reasonable steps to present a suitable mortgage
product, having regard to the needs and
circumstances of the borrower, lender or investor.
• Disclose material risks in writing, using plain
language that is brief and clear.
www.fsco.gov.on.ca
4
MBLA Act & Regulations
Disclosure of Material Risks
www.fsco.gov.on.ca
5
MBLA Act & Regulations
• Duty to disclose material risks (Mortgage Brokerages:
Standards of Practice regulation, sec. 25)
– Disclose risks in writing of each mortgage or
mortgage investment that is presented for
consideration to a borrower, lender or investor.
– Obtain written acknowledgement of the disclosure.
– Not applicable if a lender or investor is a member of a
designated class of lenders and investors.
www.fsco.gov.on.ca
6
Disclosure of Material
Risks
• Step 1: Think about what risks the mortgage
product creates for the borrower, lender or investor.
– What risks are:
• associated with the long-term?
• similar to other long-term lending or investment
products?
• associated with different types of mortgages?
www.fsco.gov.on.ca
7
Disclosure of Material
Risks
• Step 2 – Inform the borrower, lender or investor
of risks in writing and provide an explanation.
– Ensure the borrower, lender or investor understands
the risks associated with the product presented.
– Make it easy to understand.
– Use plain language that is clear, concise and logical.
www.fsco.gov.on.ca
8
Disclosure of Material
Risks
• Step 3 – Get a written acknowledgment from the
borrower, lender or investor.
www.fsco.gov.on.ca
9
Disclosure of Material
Risks
• What are examples of material risks that you
would disclose about a mortgage product to a
borrower, lender or investor?
www.fsco.gov.on.ca
10
MBLA Act & Regulations
Suitability of a Mortgage Product for
a Borrower, Lender or Investor
www.fsco.gov.on.ca
11
MBLA Act & Regulations
• Duty regarding suitability of a mortgage for a client
(Mortgage Brokerages: Standards of Practice regulation,
sec. 24)
– Take reasonable steps to ensure a mortgage or investment in
a mortgage:
• is suitable with regard to the client’s needs and
circumstances.
• will not create undue risk for the borrower, lender or
investor.
– Not applicable if your client is a mortgage brokerage or
financial institution.
www.fsco.gov.on.ca
12
What Makes a Mortgage
Product Suitable?
Determine the borrower’s needs and circumstances
• Know your client – ask the right questions.
• A suitable mortgage or investment does not expose the
borrower, lender or investor to undue risk.
• Does it fit the borrower’s, lender’s or investor’s risk
tolerance?
www.fsco.gov.on.ca
13
What Makes a Mortgage
Product Suitable?
What are “reasonable steps”?
• Step 1 - You must disclose your role to a prospective
borrower or lender.
• Step 2 - Ask the right questions to determine the client’s
needs and circumstances.
• Step 3 - Think about what makes the mortgage product
suitable for that client.
• Step 4 – Document your activities.
www.fsco.gov.on.ca
14
What Makes a Mortgage
Product Suitable?
Know your mortgage products
• Understand the range of products that are available to you
for your clients.
• If you do not have adequate expertise for the client’s
needs, you can:
– network through your brokerage
– co-broker
– make a referral
www.fsco.gov.on.ca
15
What Makes a Mortgage
Product Suitable?
• What are examples of factors you consider
for suitability of a mortgage product for a
borrower, lender or investor?
www.fsco.gov.on.ca
16
MBLA Act & Regulations
Other Duties
www.fsco.gov.on.ca
17
MBLA Act & Regulations
• Duty to verify a client’s identity (Mortgage
Brokerages: Standards of Practice regulation, sec. 10)
– Take reasonable steps to verify the identity of each
borrower, lender and investor to whom a mortgage
or investment is presented for consideration.
www.fsco.gov.on.ca
18
MBLA Act & Regulations
• Duty to verify the other party’s identity (Mortgage
Brokerages: Standards of Practice regulation, sec. 11)
– If you present a mortgage to a:
• borrower, verify the identity of the lender.
• lender, verify the identity of the borrower.
• investor, verify the identity of other investors.
www.fsco.gov.on.ca
19
MBLA Act & Regulations
• Duty to disclose cost of borrowing to borrowers
(Cost of Borrowing and Disclosure to Borrowers
regulation)
– Disclosure must be written in plain language and be
clear, concise and logical.
www.fsco.gov.on.ca
20
MBLA Act & Regulations
• Duty to disclose cost of borrowing to borrowers (cont’d)
– As of January 1, 2009, provide cost of borrowing
disclosure at least two business days before the earliest of
the following:
• The day the borrower makes a payment (other than a
disbursement).
• The day the borrower enters into a mortgage agreement.
• The day the borrower incurs any obligation in relation to
the mortgage.
– Before January 1, 2009, it is 72 hours before the borrower
is asked to sign a commitment or enter into the mortgage.
www.fsco.gov.on.ca
21
MBLA Act & Regulations
• Additional disclosure duties: term and other
mortgages (MBLA Act, sec. 24 and 25)
– Disclose all terms and conditions.
– Specify if a portion of the cost of borrowing (COB) is
rebated and, if so, how it is calculated.
– Disclose the charges and penalties for failure to pay a
mortgage at maturity, or failure to pay an installment
when due.
www.fsco.gov.on.ca
22
MBLA Act & Regulations
• Additional disclosure duties: term and other
mortgages (cont’d)
– Disclose the charges to the borrower upon entering
the agreement.
– Disclose the borrower’s rights and obligations.
www.fsco.gov.on.ca
23
Role of the Principal
Broker
• Ensures compliance with the Act and regulations
– Ensures the suitability of all mortgage products
presented.
– Makes sure there are appropriate risk disclosures for
all mortgage products presented.
– Ensures there is proper verification of identities of
the parties involved in transactions represented by
the brokerage.
www.fsco.gov.on.ca
24
Approach of the Regulator
• It is the responsibility of each brokerage, and
particularly its principal broker, to ensure that an
effective compliance program is in place.
• Compliance program should detect and monitor
suitability and risk disclosure requirements
within the organization.
www.fsco.gov.on.ca
25
Approach of the Regulator
• FSCO’s role is to ensure the industry is complying
with its legal requirements.
www.fsco.gov.on.ca
26
Your Next Steps
1. Do you know what your obligations are under
the MBLA Act for ensuring suitability and
disclosing material risks?
2. Have you made arrangements for the training
of your brokers and agents on these
requirements?
3. How do you intend to ensure suitability is
achieved and documented disclosure of
material risks requirements are met?
www.fsco.gov.on.ca
27
Other Resources
•
•
•
•
•
FSCO Website: www.fsco.gov.on.ca
Compliance Checklists
Mortgage Broker e-Info Newsletter
MBLA Act and Regulations
Industry Associations
www.fsco.gov.on.ca
28
Conclusion
• Ensuring the suitability of a mortgage or
mortgage investment and the disclosure of
material risks is intended to enable borrowers,
lenders and investors to make informed decisions.
www.fsco.gov.on.ca
29
Questions and Answers
www.fsco.gov.on.ca
30
Duty to Ensure Suitability and
Disclosure of Risks
Thank you
www.fsco.gov.on.ca
31